A re-examination of Wagner's law for ten countries based on cointegration and error-correction modelling techniques

Tsangyao Chang, WenRong Liu and Steven B Caudill

Applied Financial Economics, 2004, vol. 14, issue 8, 577-589

Abstract: Following Mann's (National Tax Journal, 33, 189-201, 1980) study, five different versions of Wagner's law are empirically examined using annual time-series data on ten countries over the period 1951 to 1996. Included are three of the emerging industrialized countries of Asia: South Korea, Taiwan, and Thailand, and seven industrialized countries: Australia, Canada, Japan, New Zealand, USA, the United Kingdom, and South Africa. The analysis is an advance over previous work in two respects. First, the stationarity properties of the data, the order of integration using the Augmented Dickey-Fuller (Journal of American Statistical Association, 74, 427-31, 1979, Econometrica, 49(4), 1057-72, 1981) test and the Kwiatkowski et al. (Journal of Econometrics, 1, 159-78, 1992) test are empirically investigated. Second, the hypothesis of a long-run relationship between income and government spending is tested using bivariate cointegrated systems and by employing the methodology of cointegration analysis as suggested by Johansen and Juselius (Oxford Bulletin of Economics and Statistics, 52, 169-210, 1990) and Johansen (Journal of Policy Modelling, 14, 313-34, 1992). Unidirectional Granger causality is found running from income to government spending for the newly industrialized countries of South Korea and Taiwan, and the industrialized countries of Japan, the United Kingdom, and the United States, supporting Wagner's hypothesis for those countries. For the five remaining countries in this study: Australia, Canada, New Zealand, South Africa, and Thailand, no causal relationship between income and government spending is found.

Date: 2004
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DOI: 10.1080/0960310042000233872

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